$357 Million FTC Settlement: Over Website Documents?
Virginia Business Brief
By Chip Cooper, Esq.
In a recent settlement, the Federal Trade Commission (FTC) made it clear that deceptive website legal forms, particularly those that support “free” offers, will not be tolerated.
According to the FTC, the deceptive marketing schemes employed by the defendants netted over $450 million in sales. The result – the FTC came down hard on the defendants, with one individual defendant giving up all the money in his bank accounts, his house, automobile, and other personal property.
The takeaways from this settlement provide clear guidelines for all Internet marketers, particularly those who with sites that use “Free” offers as a lure for upsells to provide recurring revenue, or so-called “continuity” websites.
The Marketing Schemes
The offers were for products with broad market appeal, including weight-loss pills, teeth whiteners, health supplements, work-at-home options, access to government grants, free credit reports, and penny auctions.
A key factor in the marketing scheme was the lure of “free” offers, including “free” trials. Consumers were often charged a monthly fee, typically $79.95, plus additional monthly recurring fees for “bonus” offers and upsells.
Another key factor in the marketing scheme was significant leverage through affiliates – who drove traffic to the websites with the offers through widespread use of banner ads, pay-per-click ads, pop-ups, and unsolicited email. Affiliates were paid commissions for the sales resulting from traffic sent to the offering websites.
The Devil Is In The Details
Neither of the above key factors in the marketing scheme are per se illegal. The problem, according to the FTC, is in the details of how the defendants used the key factors to deceive consumers in violation of the FTC Act.
The following checklist summarizes the deceptive elements alleged by the FTC.
- Misrepresentations About “Free”, “Risk-Free”, and “Bonus”. The primary lures for consumers were the “Free” offers. The defendants induced consumers to provide their credit or debit card information by falsely promising that the product or service could be acquired on a “free” or “risk-free” trial basis while only paying a nominal shipping and handling fee. Some offers represented that the consumer would receive a product or service as a “bonus” for simply signing up. In fact, consumers were charged for products or services that they didn’t know about or had not agreed to purchase, and in some cases the charges were recurring on a monthly basis. The process for cancelling these charges or obtaining refunds involved separate time-consuming phone calls and other steps designed to significantly increase difficulty.
- Failure to Disclose, or Deceptive Disclosure of, Additional Charges. Despite the “free” offers, there were additional charges. In some cases there was no disclosure of additional charges. In many cases, there were disclosures regarding the additional charges, but the disclosures were not in a clear and understandable manner. Additional terms were buried in a separate “terms and conditions” page loaded with “lengthy, legalistic fine print” that was not accessible from the ordering page. Consumers were not required to click on an “I Agree” button to indicate acceptance with the “terms and conditions” page.
- Deceptive Refund Policies. Another significant lure for consumers were generous refund offers. Promises included “100% Satisfaction Guarantee”, “Risk Free Guarantee”, and “Easy Money Back Guarantee… Just Follow the 3 Easy Steps”. In fact, refund requests were denied, of if promised, they were never issued. In many cases consumers had to resort to complaints to law enforcement or the Better Business Bureau to actually get a refund.
- Failure to Disclose, or Deceptive Disclosure of, Limitations on Cancellations and Refunds. Despite the refund offers, there were limitations on cancellations and refunds which were either not disclosed or not adequately disclosed.
- False and Unsubstantiated Efficacy Claims. The defendants did not possess or rely upon a reasonable basis to substantiate their advertising claims on banner ads approved by the defendants for use by affiliate marketers.
- False Celebrity and Other Endorsements. The defendants displayed images of celebrities on their websites without permission and falsely represented that these celebrities endorsed the defendants’ products. In addition, logos for prominent news entities were displayed with statements such as “Featured On” and “As Seen On TV”, when in fact none of these entities endorsed or positively reported on any of the products.
- Evading Risk Management Rules to Obtain Merchant Accounts. The defendants submitted inaccurate financial information to merchant banks in order to retain or obtain merchant credit card processing accounts.
The settlement included substantial payments by the defendants from the sale of business and personal assets. In addition, the defendants’ were enjoined for future violations of the deceptive practices discussed above.
Finally, regarding their affiliates, the defendants were ordered:
- to disclose to all affiliates that engaging in deceptive practices would result in immediate termination, and
- to monitor affiliate activities monthly for violations.
Conclusion – Important Settlement Takeaways
Most of the takeaways from this settlement are obvious egregious violations. However, there are three takeaways that are perhaps no so obvious, but which are significant for Internet marketers:
- reliance on disclosures or disclaimers in website legal documents alone is not enough to avoid liability; in this case there were disclosures regarding additional charges and refunds limitations, but they were buried in the “fine print”, and therefore, they were not clearly and conspicuously disclosed in order to avoid consumer deception;
- even if disclosures are clearly and conspicuously disclosed, using “Free” offers as a lure for upsells, particularly if the upsells involve recurring revenue (continuity plans), will always be a red flag issue, and therefore, attract close scrutiny by the FTC; and
- using affiliates to advertise and drive traffic for sales does not absolve an Internet marketer merchant from liability for the affiliates’ deceptive practices; monitoring of affiliate marketing practices and termination of offending affiliates is required.
Here’s How To Make Sure You, Your Virginia Business & Website Is FTC Compliant
By now it should be clear how important it is for you to be FTC compliant. But how can you do that without spending $7,500-$8,000 or more on Internet Attorneys?
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Remember: legal protection is a massively important part of your business, and it’s one you cannot afford to ignore any longer.
Disclaimer: This article is provided for informational purposes only. It’s not legal advice, and no attorney-client relationship is created. Neither the author nor FTC Guardian, Inc. is endorsed by the Federal Trade Commission.